Thank You

Error.

THIS MONTH'S TROUBLE with mega-financial firms has certainly sent the stock market reeling. The question now is whether the latest news of
Merrill Lynch'
s (ticker: MER) buyout and
Lehman Brothers'
(LEH) bankruptcy and demise is the final washout before the bottom or the start of the next leg down.

Based on such market internals as volume, breadth and momentum, the latter seems more likely.

I am not going to get into the details of what happened to these stocks or try to point out how the charts might have alerted us to the end results. That's all water under the bridge. Suffice it to say that the trends in both of these Wall Street giants were down and surprises happen in the direction of the trend.

Multi-hundred point swings have become rather ubiquitous of late whether they occur from one day to the next or within the very same day. Of course, string enough of them together and we have a different story, but for now these large moves are occurring in both directions.

The next argument for the bulls stems right from the volatility of these multi-hundred-point moves themselves. The Chicago Board Options Exchange volatility index, a.k.a the VIX, reached 31.7 Monday and the last time it traded there was at the July market low.

The VIX, as with all sentiment-based indicators, can be a useful tool to measure extreme fear in the market and therefore potential contrarian signals for bottoms. The problem is defining what an extreme level really is.

Tradable lows in the Dow, for example, have occurred when the VIX tops 30 and then backs down. What this means is we could be seeing a near-term bottom forming right here.

However, major bear market bottoms require a bit more fear and the VIX topped 40 after the last one in July and October 2002. Therefore, I cannot say that any bottom made now on the current fears springing from the financial sector signals the true end of the bear market. In short, the stock market hasn't yet achieved that level of maximum pessimism that often presages a turning point.

If you're looking for blood on the streets, you'll have to wait a bit.

On the bearish side, the trend from nearly one year ago is still down. In the financial markets as in physics, the trend is presumed to be in place until proven otherwise. It will take a bit more than the market not collapsing in one morning to make it safe for investors to wade back in.

Being resilient is not quite enough. The market needs to start reacting positively to good news and that has just not been the case.

For example, on September 2, as Wall Street returned from its summer holiday with a huge morning rally. Apparently, the market was relieved that Hurricane Gustav spared the Gulf of Mexico's energy platforms. But the good times were erased by the close and the rest of the week saw further erosion of prices.

One week later, on September 8, the market rallied sharply on the news of the Fannie and Freddie bailouts only to give it all back the next day.

So, we have a lack of any real reaction to presumably bullish events. We also have several days of intense selling in place this month when the overwhelming majority of the market is sold with abandon.

According to institutional advisor Lowry's Reports, such days of intense selling, called 90% downside days, when 90% of all stocks and all volume traded, appear during bear markets. Only a 90% upside day appearing soon afterward signals the rush back to stocks, - demand - and the end of the bear market.

We have not had anything resembling a 90% upside day. Fear may be at levels signaling a market ripe for rally but the actions of traders and investors has not validated it.

For investors, the strategy remains a bear market one. Sell rallies, conserve capital and, if appropriate, look for opportunities to make money as prices fall.

Getting Technical Mailbag:Send your questions on technical analysis to us atonline.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.